Bassett Furniture Industries, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Quarter ended February 25, 2017. Unaudited consolidated results compared with the quarter ended February 27, 2016; balance-sheet comparisons are to November 26, 2016. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and key financial results
Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. Its Zenith subsidiary provides logistics services. At quarter-end, the network included 60 Company-owned and 29 licensed stores.
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $105.9 | $106.9 | Down 0.9% |
| Furniture and accessories revenue | $93.7 | $92.4 | Up 1.4% |
| Logistics revenue | $12.2 | $14.5 | Down 15.7% |
| Operating income | $4.7 | $5.8 | Down 19.5% |
| Operating margin | 4.4% | 5.4% | Down 1.0 percentage point |
| Net income | $2.9 | $3.2 | Down 11.5% |
| Diluted EPS | $0.27 | $0.30 | Down $0.03 |
Operations, margins, and material changes
- Wholesale: Revenue rose 4.0% to $62.0 million; operating income increased to $5.9 million from $4.4 million. Segment gross margin improved to 35.2% from 34.0%, supported by domestic upholstery pricing and improved imported wood product margins. Shipments to the Bassett store network rose 6.7%, while open-market shipments declined 3.2%.
- Company-owned retail: Revenue was essentially flat at $61.6 million, but the segment recorded an operating loss of $1.3 million versus income of $0.3 million. Comparable-store sales increased 1.0%, while comparable written sales rose 3.7%. Comparable-store operating results weakened from $1.0 million income to a $0.2 million loss; lower gross margin and higher advertising, marketing, and occupancy costs contributed.
- Logistics: Revenue declined 9.5% to $22.3 million and the segment swung to a $0.2 million operating loss from $0.7 million income. A $3.3 million decline from one significant non-Bassett customer was partly offset by growth elsewhere. Lower freight volume reduced load factors; fleet-related fixed costs, fuel costs, and new-center start-up costs also weighed on results.
- Consolidated SG&A excluding new-store pre-opening costs declined slightly to $58.5 million, but rose to 55.3% of revenue from 55.2%. New-store pre-opening costs increased to $0.8 million from $0.1 million.
Cash flow, liquidity, and debt
- Operating cash flow was $2.1 million, versus $2.4 million a year earlier. Capital expenditures were $5.6 million; investing cash outflow was $6.0 million, including $0.7 million for the Columbus licensee-store acquisition.
- Financing cash outflow was $7.7 million, including $4.3 million in dividend payments and a $3.0 million installment on the Zenith acquisition note. Cash declined $11.6 million to $23.5 million. Cash plus short-term certificates of deposit totaled $46.6 million at quarter-end; management said available liquidity was sufficient to fund foreseeable operations.
- Notes payable had $4.1 million of principal outstanding, of which $3.4 million was due within one year. The $15.0 million unsecured credit facility had $13.0 million available after standby letters of credit; the company reported covenant compliance.
- Current assets were $130.2 million and current liabilities $69.9 million. Stockholders’ equity was $182.5 million.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management planned further store openings and repositionings, including openings in Pennsylvania during 2017 and Wichita in early 2018; licensed-store openings were also scheduled for 2017.
- Management expected approximately $2.0 million of additional new-store pre-opening costs and post-opening losses in 2017 versus 2016. It noted that new stores can require time to reach break-even and typically incur start-up losses.
- Operating lease minimum payments totaled $155.3 million. Bassett also guaranteed $1.6 million of licensee lease obligations. Management identified possible retail-property impairment and insufficient sublease income on guaranteed leases as risks in weak real-estate markets.
- Other cited risks include consumer demand and housing conditions, competition, raw-material and fuel costs, store performance, import-supply-chain interruptions, domestic manufacturing concentration, and Zenith’s freight operations. Legal and environmental matters were described as ordinary-course matters not expected to have a material adverse effect based on currently known facts.
- The Columbus, Ohio store acquisition cost $0.7 million and added $0.3 million of goodwill; its pro forma and post-acquisition operating effects were not material. The quarter’s effective tax rate was 27.2%, compared with 37.0% a year earlier; the current-quarter provision included $0.3 million of excess tax benefits on stock-based compensation.
- The company said adoption of the new lease standard, effective for it in FY2020, is expected to materially affect the balance sheet. It did not expect the other discussed upcoming accounting standards to have material effects, except where noted as still under evaluation.
Important facts for investors to verify
- Whether comparable-store sales and written-sales growth translate into improved retail profitability, given the quarter’s comparable-store operating loss.
- Whether Zenith can replace lost volume from its significant non-Bassett customer and improve load factors and segment margins.
- Progress, costs, and break-even timing for planned store openings, alongside management’s expected additional 2017 start-up costs.
- Near-term debt maturities, cash generation, capital spending, dividends, and the company’s ability to sustain liquidity while executing its retail strategy.
- Potential exposure from long-term lease commitments, licensee lease guarantees, inventory obsolescence, and owned retail real estate.